October 30, 2015
Authored by: Kathy Sherby and Stephanie Moll
Even though you think you have done everything right, the statute of limitations may not have started to toll if your Form 709, Gift (and Generation-Skipping Transfer) Tax Return, contains errors. Once a properly completed (how much can we stress the words PROPERLY COMPLETED?) Form 709 is filed, the Service must assess the amount of any gift tax within three years of the filing date. Under the Regs, a transfer is adequately disclosed when the return provides the following:
(i) A description of the transferred property and any consideration received by the transferor; [and]
(iv) A detailed description of the method used to determine the fair market value of property transferred, . . . including any financial data . . . utilized in determining the value of the interest.
In FAA 20152201F, the taxpayer reported the gift of two partnership interests, the assets of which consisted primarily of farmland. The value of the farmland was appraised by a certified appraiser. The issue here is whether the return in question satisfied the Regs.
- The return only provided an 8 digit, as opposed to the complete 9 digit, TIN for the donor.
- The return also contained incorrect abbreviations of the partnerships.
- Further, it omitted the LP and LLP designations, wrongly implying that they were traditional partnerships under state law. With these incorrect and incomplete descriptions, the Service was unable to locate the proper partnership interests.
- The return also failed to explain the extent of the partnership interests transferred.
Further, the Regs also require “a detailed description of the method used to determine the fair market value of property transferred … including any financial data … utilized in determining the value of the interest.” This was not provided at all. The taxpayer only provided the appraised value of the land and not the value of the partnership interest.
When the gift is not an entity that is actively traded, as is the partnership interest here, “any discount claimed in valuing the interests in the entity or any assets owned by such entity” must also be provided. Here, this description suggests the partnerships are properly valued based on the net value of their assets.
When a return inadequately identifies the partnership and its proper fair market value of the interests gifted, the statute of limitations exception applies and the Service may assess a gift tax at any time.
*Thanks to Alex Fersa for his drafting assistance.